The Shriver Brief : Poverty Law Commentary & Insights : Sargent Shriver National Center on Poverty Law : Affordable Housing, Healthcare Reform

Although lending has declined over all since the economic downturn, a closer examination of the numbers shows that small banks have stepped up and actually increased their small business lending programs. Small bank lending has jumped 5% since May 2011, and bigger institutions like CitiBank are feeling the pressure to keep up their lending. As Biz2Credit.com recently reported, small banks increased their approvals of SBA(7) express loans, which are backed by the U.S. government (meaning they are less risky for the lender in the event that the bank defaults) to small businesses. These loans, which were once the domain of larger banks, have increasingly been offered by smaller banks that are closing in on the market and filling the gaps to meet the needs of small business owners.

According to Banking Grades, a tool that grades banks based on their lending practices to small business, big banks largely received failing grades because they are not equipped to lend to small business due to their complex bureaucracies. It is easier for small businesses to obtain loans from small banks. Smaller banks are more likely to look beyond credit scores and financial statements and into a business’s practices and other qualities. Small banks can also afford to dedicate more time to small businesses. Additionally, unlike bigger banks that made bad investments and offered risky products, small banks remained stable during the recession.

Another reason we are seeing a boost in small business lending overall is thanks to the Volcker Rule, a section in the Dodd-Frank bill. This rule restricts banks from making speculative investments that do not benefit the customer, such as propitiatory trading, where banks trade with their own money as opposed to their customers’ money to make a profit for the bank. Due to these restrictions, which become effective on July 21^st, all banks will be forced to increase their small business lending in order to make money to replace the revenues lost from propitiatory trading. 

The Community Reinvestment Act (CRA) also has a part to play in the uptick of small business loans. The CRA requires financial institutions to invest in distressed or underserved areas. A small business in a low-to-moderate-income community can ensure that it borrows from a bank receives CRA credit. One way to ensure that big banks increase their lending in low-to-moderate income neighborhoods is to reform the CRA to reward community banks for their efforts while requiring big banks to do more. For instance, H.R. 1662, the Bank Accessibility Act, would require federal financial supervisory agencies, in determining whether or not a bank has met the credit needs of low- and moderate-income neighborhoods, to consider factors such as (1) the branch distribution of such institutions in such communities, and (2) the services provided to borrowers in these communities by such institutions, including free check cashing and debit card and ATM services. This bill would also require the consideration of such factors to be weighted to account for approximately 33% of an institution's rating. Other bills have sought to amend the CRA to, among other things, improve its grading methodology and explicitly require examinations into a bank’s minority lending practices. 

In sum, it appears that small business lending is on the rise with small banks leading the way. Yet, federal regulators must be encouraged to expand the scope and enforcement of the CRA to encourage larger banks to further increase their lending activities in low- and moderate-income communities.

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The Department of Justice (DOJ) ended 2011 with a bang, reaching an enormous $335 million fair-lending settlement with Countrywide Financial Corporation and its subsidiaries. The record-setting settlement secures relief for more than 200,000 African American and Hispanic borrowers who were more often steered into subprime mortgage loans or were charged higher fees than were white borrowers with similar credit profiles. The proposed consent order of December 21 resolves DOJ’s claims that Countrywide’s lending practices during the housing boom of 2004–2008 violated both the Fair Housing Act and the Equal Credit Opportunity Act.

The Equal Credit Opportunity Act (ECOA) prohibits discrimination in every phase of a credit transaction such as a mortgage loan. When creditors discriminate on the basis of race, ethnicity, marital status, or another protected class, they subject themselves to civil liability for actual and punitive damages. Private citizens can bring ECOA claims, as can several authorized government agencies such as the Department of Justice and the new Consumer Financial Protection Bureau. ECOA has been on the books since 1974, but its enforcement has been minimal. The foreclosure crisis and its disproportionate impact on minority groups, however, have renewed public interest in fair-lending laws such as ECOA—and given DOJ’s landmark discrimination settlement, this revived focus has come none-too-soon.

ECOA is valuable for more than just compensating victims of discriminatory lending, as was accomplished by DOJ. Many people who were unfairly steered into subprime mortgages ultimately found themselves facing foreclosure. In the current issue of Clearinghouse Review: Journal of Poverty Law and Policy, Jennifer D. Newton and Tamara St. Hilaire of Florida Legal Services explain how advocates can use ECOA to challenge and prevent such foreclosures. The authors explain that borrowers, depending on where they live, may file a lawsuit under ECOA to prevent a foreclosure or, if a foreclosure case is already underway, may countersue under ECOA or use it as a defense against the foreclosure action. Plaintiffs may prove discrimination with direct evidence of discriminatory intent. Most courts also allow plaintiffs to meet their burden of proof with circumstantial evidence of disparate treatment or impact.

When courts allow disparate impact claims under ECOA, they look to fair housing discrimination cases for guidance. The U.S. Supreme Court will also be looking at disparate impact claims under the Fair Housing Act (FHA) later this year when it decides Magner v. Gallagher, which is scheduled for oral argument on February 29. Specifically, the Court will decide whether disparate impact claims are cognizable at all under FHA and, if so, how they should be analyzed. The outcome of Magner will likely affect how courts view disparate impact claims brought under ECOA as well.

In the meantime, the Justice Department will be appointing an independent administrator to identify victims of Countrywide’s discriminatory lending who are entitled to compensation as a result of the settlement. Those who believe they were discriminated against by Countrywide and have questions about the settlement may contact the Department at countrywide.settlement@usdoj.gov. 

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